Krispy Kreme Doughnuts, Incorporated

Contact Information:

headquarters: 370 knollwood street, suite 500
winston-salem, nc 27103 phone: (336)725-2981 fax: (336)733-3794 email: [email protected] url: http://www.krispykreme.com

OVERVIEW

Based in Winston-Salem, North Carolina, Krispy Kreme Doughnuts is a leading branded specialty retailer of premium quality doughnuts. In 2001, it was estimated that it sold five million donuts a day and more than two billion a year.

Founded in 1937, Krispy Kreme operates a chain of 218 shops in 33 states and Canada that offer its signature doughnuts, including its best-known offering, the Hot Original Glazed. Each shop has the capacity to produce from 4,000 dozen to over 10,000 dozen doughnuts daily. Shop sites are located in Alabama, Arizona, California, Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Michigan, Mississippi, Missouri, Nebraska, Nevada, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, and Ontario, Canada.

Besides serving its sweet offerings to customers, Krispy Kreme also sells its food products to supermarkets and convenience stores. In 2001, approximately 123 of the company's stores sold to major grocery store chains like Food Lion and Acme Markets, as well as to local and national convenience stores and select co-branding customers. Krispy Kreme also sells its ingredients and equipment to its franchisees.

Krispy Kreme's organizational structure includes three reportable segments: company store operations, franchise operations, and Krispy Kreme Manufacturing and Development (KKM&D). Company store operations include company stores and consolidated joint venture stores that make and sell doughnuts and complementary products through on-premise and off-premise sales channels. Franchise operations include the associate program and the area developer program. KKM&D involves the buying and processing of ingredients to produce doughnut mixes. Also, this unit manufactures doughnut-making equipment that all of Krispy Kreme's stores are required to purchase, and it makes and sells all supplies necessary to operate a Krispy Kreme store, including all food ingredients, juices, Krispy Kreme coffee, signage, display cases, uniforms and other items.

COMPANY FINANCES

For the fiscal year that ended February 3, 2002, the company's revenues rose 31 percent to $394.4 million. Company revenue in 2001 was $300.7 million. Net income increased 79 percent to $26.4 million, up from $14.7 million in 2001. For the full fiscal year 2002, system-wide sales of $621.7 million rose 38.7 percent versus the previous year. Company store sales for all of fiscal year 2002 increased 24.6 percent over 2001. This topped sales growth of 9.7 percent in 1999 and 12.7 percent in 1998. The company attributed the rise in revenues from increased comparable store sales and new franchise stores as well as improved operating efficiencies and lower interest expense.

ANALYSTS' OPINIONS

Krispy Kreme stock soared when the company expanded beyond the South in the mid-1990s. This led some investors to think the franchise had the potential to be another Starbucks. However, others were skeptical, and analysts expressed caution. When Starbucks had expanded, it faced little competition. Krispy Kreme, on the other hand, had many competitors, including the strong Dunkin' Donuts chain. Plus in recent years, other high-profile franchise enterprises had failed, including Boston Chicken, Discovery Zones, and TCBY. Some analysts were waiting to see how Krispy Kreme handled the franchiser-franchisee relationship and what effect its aggressive expansion would have.

HISTORY

Krispy Kreme Doughnuts' beginnings go back to 1933, when Vernon Rudolph, the company founder, bought a doughnut shop in Paducah, Kentucky. With the purchase, he acquired the rights to a secret yeast-raised doughnut recipe that would provide the foundation for the company's hugely successful product. At first, the small business primarily sold and delivered doughnuts to local grocery stores. Buoyed by early success, Rudolph and his partner went after a larger market. In 1937, they moved their operations to Nashville, Tennessee, where they opened a doughnut shop and took on the name Krispy Kreme Doughnuts. The company was officially established.

Eventually, Rudolph opened a shop in Winston-Salem, North Carolina, which would become the headquarters of the company. Short on cash, Rudolph borrowed money from a local grocer, promising to pay him back once he sold enough doughnuts. The grocer didn't have to wait long. With other family members brought into the business, the company branched out to Charleston, West Virginia, and Atlanta, Georgia.

By the 1960s, Krispy Kreme had developed and established its trademark look: a store topped by a green roof and emblazoned with the "Marching Ks" symbol. By this time, the coffeehouse had been added, and a large window gave customers a close-up look at Krispy Kreme's unique doughnut-making process.

Vernon Rudolph died in 1973. Soon after, the company was sold to a large food service business that implemented many changes—not all for the best. New and different ingredients were used to make the doughnuts, diluting the distinctive Krispy Kreme flavor. Also, quality further suffered as attention to detail diminished. Eventually the company was resold and former workers returned to the fold, bringing with them knowledge of the "old ways." Krispy Kreme was back on track.

In 1977 the company made a pivotal hire that would prove crucial to Krispy Kreme's future success. That was the year Scott Livengood, the company's current CEO, came on board. He became president in 1992 and CEO in 1998. In 1999, he was also elected chairman of the board.

For more than 60 years, the company had been a Southern institution. However, by the mid-1990s, it had made some encroachments into Northern territory, led by Livengood. The move proved a resounding success, as the company's distinctive recipe gained new fans in other parts of the country. The company had become such a favorite that in 1997, some Krispy Kreme artifacts were added to the Smithsonian Institution's National Museum of American History. In 1999, the company incorporated.

STRATEGY

Krispy Kreme's success can be attributed to five elements: marketing, a vital business model, attention to quality, a balanced financial model, and aggressive expansion.

In recent years, Krispy Kreme's marketing strategy has been to capitalize on the strong market existing for doughnuts by establishing itself as a leader using the power of its recognized brand name, turning out a high volume of product, and entering targeted markets through several sales channels.

Krispy Kreme employs a unique and successful business model. The company is divided into two business units that complement each other: store operations (which includes the company store segment and the franchise store segment) and manufacturing and development or the KKM&D unit. Its main source of revenue is the sale of doughnuts produced and distributed by store operations, a highly automated, high-volume producer of product. KKM&D, with its strong operating competencies and capabilities, supports the stores.

In the area of quality, the company sets itself apart from competitors by using the best ingredients and a vertically integrated production process designed to create consistent quality in an efficient manner. Quality control efforts include state-of-the-art laboratories in its manufacturing plants. These labs perform quality tests on all key ingredients and each batch of mix.

With its financial model, Krispy Kreme creates sales and income from its stores, franchise fees and royalties, and a vertically integrated supply chain that supports its operations.

Krispy Kreme also employs an aggressive expansion campaign. Sixteen new stores opened in 2000, while 25 opened in 2001. By 2000, area franchisees were contractually obligated to open 250 new stores between January 2001 and January 2006.

FAST FACTS: About Krispy Kreme Doughnuts, Incorporated

Ownership: Krispy Kreme Doughnuts, Incorporated is a publicly owned company that is traded on the New York Stock Exchange.

Ticker Symbol: KKD

Officers: Scott A. Livengood, Chrmn., Pres. and CEO, 48, 2001 base salary $375,000; John N. McAleer, VChmn., EVP Concept Development, 42, 2001 base salary $214,000; John Tate, COO, 50, 2001 base salary $83,769; Paul J. Breitbach, VP Finance, Administration, and Support Operations, 2001 base salary $252,000

Employees: 3,200

Principal Subsidiary Companies: Krispy Kreme Doughnuts, Incorporated sells doughnuts and related items through company-owned stores, and sells doughnut-making equipment and mix to company-owned and franchised stores. The company operates through three business segments: company store operations, franchise operations, and Krispy Kreme Manufacturing and Distribution (KKM&D). The KKM&D business unit produces doughnut mixes and manufactures doughnut-making equipment. The company operates a chain of 218 shops in 33 states and Canada.

Chief Competitors: As Krispy Kreme operates in the service sector of the restaurant industry, technically its competition includes any restaurant, from a Lone Star to a TGIF. However, its most significant competition comes from the chains that serve pastries and coffee, particularly Starbucks and especially Dunkin' Donuts. As a matter of fact, Krispy Kreme faces competition from any small independent restaurant that has a breakfast counter or any coffee shop.

INFLUENCES

Krispy Kreme blossomed in the late 1990s thanks largely to the guidance of its CEO, Scott Livengood, who was instrumental in transforming it from a regional wholesaler into a nationally recognized and leading brand specialty retailer. In guiding the company through its expansion, he has developed markets for Krispy Kreme doughnuts across the United States, and he has taken the company into Canada while planning for even more international growth. The company began expanding in 1996, when it only had 95 stores. By the turn of the century, it had more than 200.

CURRENT TRENDS

As far as the future is concerned, Krispy Kreme believes there are no boundaries. After a strong year in 2002, Krispy Kreme felt it had exceptional growth potential and opportunities, thanks to new initiatives that included the development of the small-format doughnut and coffee shop, international opportunity, and an expanded beverage program. The company also revealed plans to open a new manufacturing and distribution facility in Illinois that would facilitate its expansion into the Midwest, West, and Canada.

Krispy Kreme also designed and perfected a new doughnut machine, about the size of a small car, that could help the company open even more outlets in places like center city locations, train stations, and small towns. The machine's smaller size makes it possible for the company to open smaller stores that could be operated more cheaply and in spaces about one-fifth the size of its typical 4,500-square-foot store. As a result, company officials believe they can open thousands of new stores across the country.

PRODUCTS

Krispy Kreme is best known for fresh, glazed, yeast-raised doughnuts, especially the "Krispy Kreme Original Glazed," its first and best-known doughnut. All of its doughnuts are made from a secret recipe that has been in the company since 1937.

Unlike other doughnut shops and restaurants, Krispy Kreme serves its doughnuts hot, which has undoubtedly added to their popularity. Along with the original glazed, company stores offer a variety of doughnut styles including chocolate iced, chocolate iced with sprinkles, maple iced, chocolate iced creme filled, chocolate iced custard filled, raspberry filled, lemon filled, cinnamon apple filled, powdered blueberry filled, glazed creme filled, traditional cake, chocolate iced cake, glazed cruller, powdered cake, glazed devil's food, chocolate iced cruller, cinnamon bun, glazed blueberry, and glazed sour cream. Krispy Kreme also makes fruit pies, cinnamon buns and several varieties of snack foods. Its shops also serve coffee and juices.

Krispy Kreme not only sells its doughnuts in its shops, it also packages and markets its products for sale in supermarkets, convenience stores and other retail outlets throughout the country.

CORPORATE CITIZENSHIP

Since 1937, Krispy Kreme has been active in community fundraising. Through the years, it developed successful fundraising programs for schools and community clubs and organizations. The company helps fundraising efforts by supplying quantities of doughnuts for sale.

CHRONOLOGY: Key Dates for Krispy Kreme Doughnuts, Incorporated

1933:

Company founder Vernon Rudolph buys his first doughnut shop, in Paducah, Kentucky

1937:

The company is officially founded when Rudolph names his business enterprise Krispy Kreme Doughnuts

1937:

Rudolph expands his business into Tennessee and North Carolina

1973:

Vernon Rudolph passes away

1977:

Scott Livengood is hired

1997:

Krispy Kreme artifacts are placed in the Smithsonian Institution's National Museum of American History

1998:

Scott Livengood is named CEO of Krispy Kreme Doughnuts

1999:

Krispy Kreme Doughnuts is incorporated

2001:

Krispy Kreme announces its international expansion plans

DOUGHNUT HOLES

When Krispy Kreme Doughnuts founder Vernon Rudolph opened a shop in Winston-Salem, North Carolina, he planned on selling the doughnuts he made to local grocery stores. However, the product became so popular that people began stopping by and asking if they could buy doughnuts on site. Rudolph obliged. The demand for customer service then became so great that Rudolph had to cut a hole in the shop's wall to serve more people. That somewhat crude innovation foreshad-owed Krispy Kreme's modern-day window service.

GLOBAL PRESENCE

Since the 1930s, Krispy Kreme had been a uniquely American business. However, encouraged by increasing and phenomenal success in the last decades of the twentieth century, the company began setting its sights on international markets. In 2001, Krispy Kreme hired an executive, Donald Henshall, to plot its global expansion strategy, and it entered a partnership to expand into Canada, its first venture outside U.S. borders. According to the plan, Krispy Kreme Doughnuts Eastern Canada, Inc. would open 32 stores over six years in eastern provinces including Ontario and Quebec. At the time, the company had no immediate plans to open a store overseas, although that was certainly a future goal.

EMPLOYMENT

By 2001, Krispy Kreme had 3,200 employees filling various roles in its stores throughout the country. Positions include "Krew leader," retail specialist, processing specialist, coffee specialist, route salesperson, route sales manager, and sanitation specialist. The company offers employees a benefits package that includes medical, dental and life insurance plans, as well as paid training and vacation, a 401(k) savings plan, advancement potential, discounted products, and disability programs.

For career development, Krispy Kreme offers a management training course that involves classroom training followed by on-the-job training. Upon completing the training, students are ready run a store.

SOURCES OF INFORMATION

Bibliography

associated press. "krispy kreme profits a delicious double," daily news.com, 9 march 2002. available at http://dailynews.com/business/articles/0302/09/biz04.asp.

businessweek online. "krispy kreme doughnuts." company profile/s&p business summary, 9 april 2002. available at http://research.businessweek.com.

craig, michael. "the hole nine yards," business 2.0, 4 june 2001. available at http://business20.com.

deck, stewart. "krispy kreme: the doughnuts that keep on giving," taquitos.net, 2002. available at http://www.taquitos.net/yum/kk.shtml.

hoover's online. "krispy kreme doughnuts, inc. profile," 10 april 2002. available at http://www.hoovers.com.

icon partnerships. "krispy kreme doughnuts," 2002. available at http://www.icon.com/partners/partners_krispy_kreme.html.

investors.com. "scott a. livengood," 2002: a business and economic outlook. available at http://www.investors.com/2002conference/scottlivengood.html.

yahoo! profiles. "profile-krispy kreme doughnuts," 10 april 2002. available at http://biz.yahoo.com.

For an annual report:

on the internet at: http://199.230.26.96/kkd/annrep.shtml

For additional industry research:

investigate companies by their standard industrial classification codes, also known as sics. krispy kreme doughnuts, incorporated's primary sics are:

2051 breads, cakes and related products; doughnuts exceptfrozen

2053 doughnuts frozen; frozen bakery products except bread

3556 food products machinery

5461 retail bakeries

also investigate companies by their north american industry classification system codes, also known as naics codes. krispy kreme doughnuts, incorporated's primary naics codes are:

311812 bread products, fresh, made in commercial bakeries;doughnuts made in commercial kitchens

311813 doughnuts frozen, manufacturing

333294 bakery machinery and equipment manufacturing